Strong gold & crude oil thrust CRB index high

01 Mar '08

3 min read

Many grain elevators no longer feel that the futures market provides an effective hedging tool for them and some are either refusing to take on additional cash grain or are offering prices that translate into ridiculously low basis levels of 2 to 3 dollars off. We are hearing similar stories out of the soybeans and corn markets, where the cash basis has been under pressure as well.

Cotton may not be quite as bad yet but were are also seeing a weakening of the basis as cash prices are not able to keep pace with this fast rise in the futures market. While May futures have rallied 1150 points between February 13 and 26, the A-index has gained just 885 points during the same time frame. In other words, the basis has weakened by 265 points, which is not good news for merchants who are heavily futures short against physicals.

According to the latest spec/hedge report, speculators continued to add to their net long position and owned 80'212 contracts or 28.6 percent of open interest as of last Friday. The trade increased both its long and short holdings, but what sticks out are the outright trade shorts that amounted to 230'081 contracts, up 21'562 contracts on the week. This means that the trade currently owns 4 out of every 5 shorts in the market.

Judging by the jump in open interest of almost 14'000 contracts this week to a record 293'848 contracts, speculators and hedgers seem to have further increased their respective positions. The trade most likely added some additional hedges against new crop grower fixations, which became quite active when December surpassed the 80 cents level.

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Plexus Cotton Limited

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